An Unforeseen Effect of Global Warming?

Is the unusually hot summer that we are sweltering through causing a sudden outbreak of nonsense to be written by moderately illustrious economists this week? It all seems to have started with Allan Meltzer, coming from the hard right in Tuesday’s Wall Street Journal, whose outburst provoked this response from me. Then, hard on Meltzer’s heels, there was Martin Feldstein, coming from the moderate right, with this bit of ill-informed pomposity. Marcus Nunes provided a brief, but well-targeted, response to Feldstein’s pontification.

Now, today, we have Jeffrey Sachs, coming from the center-left, in the Financial Times, posing as the voice of reason, rising above the obsolete debates between the irrelevant ideologies inherited from the 1920s and 1930s.

The two sides of the debate live in timeless and increasingly irrelevant ideologies. The prescriptions of free market economics peddled by the Republicans – slash taxes and spending, end financial and environmental regulations – are throwbacks to the 1920s. Today’s free market ideologues are uninfluenced by the lessons of recent history, such as the financial crisis of 2008 or the devastating climate shocks hitting the world with ever-greater frequency and threatening far more than the economy. Their single impulse is the libertarianism of the rich: the liberty to enjoy one’s wealth no matter what the consequences for the economy or society.

The other side is also wide of the mark. In Paul Krugman’s telling, we are in the 1930s. We are in a depression, even though the collapse of output and rise of unemployment in the Great Depression was incomparably larger and different in character from today’s economic stagnation.

In Krugman’s simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem. There is no global competitiveness challenge, since “competitiveness” is a myth when applied to national economies. Fiscal multipliers are predictable, timeless, persistent, and large. All growth reversals can be solved through larger deficits. Politicians can be trusted to design short-term stimulus spending programmes of hundreds of billions of dollars. Tax cuts are about as good as increases in government spending, and short-term boosts in spending are about as good as long-term public investments. Not one of these conclusions stands scrutiny.

Both Krugman and Brad Delong, not surprisingly, are miffed by Sachs’s attack on the Keynesian model as irrelevant to today’s problems. Krugman defends the IS-LM model as a good way of identifying the chief problems preventing the economy from recovering the ground lost since the 2008 downturn. Krugman believes that the key contribution of the IS-LM framework is to focus attention on the zero-lower bound problem. I agree that that is an important problem, and IS-LM identifies it, but I am not so sure that IS-LM is the best way to think about it. In my paper “The Fisher Effect under Deflationary Expectations,” I think that I showed that the simple Fisher equation may provide at least as much insight into the zero lower bound problem as the IS-LM model. And I have also complained, as Sachs does, that our thinking about what to do about our current difficulties should not be restricted to the Keynes-Hayek stereotypes in which economic debates are now so often framed.

But my point in this post is not to argue with Krugman, it is rather to agree with him that Sachs is way, way off base in his argument in today’s Financial Times. Does Sachs really think that a 4% annual rate of growth in nominal GDP since the end of the 2008 downturn is sufficient to support a recovery? Has there been any recovery since the Great Depression that has been associated with a rate of growth in nominal GDP of 4%? I don’t think so. If Sachs thinks that 4% nominal GDP growth is adequate, is he prepared to argue that macroeconomic policy should not aim at a faster rate of growth in nominal GDP? Actually I would be shocked if Sachs does think that 4% growth is adequate, but If he does, then he needs to explain why, rather than engage in the pretense of rising above an irrelevant debate between those who are in favor of policies skewed to favor the wealthy and those who simply want to increase the size of the federal deficit and don’t care about the size of the debt burden. And if he doesn’t think that 4% nominal GDP growth is adequate, then he needs to support policies that would raise nominal GDP growth. Those policies need not be Keynesian policies, but he can’t just ignore the question as he does in today’s very unhelpful contribution to the discussion of economic policy.

I agree with Delong-there are some structural problems but now is hardly the time to deal with them.

“those who simply want to increase the size of the federal deficit and don’t care about the size of the debt burden”

David I must admit to having some sympathy with that view. I think one should at least differentiate between the structural deficit and the part due to the recession.

With Treasurys at these levels there’s never a better time to borrow.

The deficit then is something that would count under structural issues you’re better off worrying about during booms rather than busts.

Of course many think it would be armageddon but if the Bush tax cuts were to expire-I don’t ideally prefer this; I just want the top rates on income and dividends to expire-our structural deficit problems would be largely over.

Indeed with this along with the end of the costly Iraq and Afghanistan wars the whole basis for the structural deficit-net of the part due to the downturn-would be solved.

One thing that irritates me above all else is when someone cannot even properly quote a point of view with which he disagrees.

I read Krugmans blog (and this one) regularly, and so I know pretty well what Krugman thinks. These sentences:

“In Krugman’s simplified Keynesian worldview, there are no structural challenges, only shortfalls in aggregate demand. There is no public debt problem.”

are actually about the *opposite* of what Krugman says. It would be one thing if Krugman were muddled about how he expresses his views, of if he didn’t discuss these subjects regularly. Let’s be clear

(a) Krugman believes there are plenty of structural challenges. He just doesn’t believe they have anything to do with *our current economic slump*. The structural problems include a disfunctional medical system, tax policies that favor financial shuffling rather than productive entreprise, and too low taxes on high incomes in general. These problems existed in 2005 and somehow didn’t cause an economic slump then. Fixing them might be salutary, but it wouldn’t get us out of the economic slump.

(b) Krugman has repeatedly said that there is a significant medium term debt problem. His view – and really he can’t possibly say it any more clearly than he does – is that trying to address it when you’re up against the zero lower bound is counterproductive, as demonstrated by recent events in the UK and the Euro zone. You have to wait until the depression is over, and then make the changes you need to, especially those that would address (a).

So given the triviality of the mistakes Sachs is making, why would one take seriously any of his other arguments?

It is frustrating to be a non-partisan Market Monetarist these days. It’s like being in a bar where people are arguing whether beer or wine gets you more drunk, but no one is referencing the relative alcoholic content or quantity consumed (I have really stupid bar mates).

And no one seems to be eying the main chance—we can wipe out trillions in federal debt through QE while stimulating the economy. Is there a shrewd businessman in the world that would not eye this opportunity greedily?

” Does Sachs really think that a 4% annual rate of growth in nominal GDP since the end of the 2008 downturn is sufficient to support a recovery?”

If he is like most economists, he doesn’t see “NGDP” as “causing” anything. He sees perhaps a more Keynesian, “planned expenditures as a function of present income, prices and nominal interest rate”, but doesn’t see it as explaining the deep malaise we are now in

Lorenzo, Thanks for flagging the broken link for me; it is now fixed. I was planning to put my paper on SSRN, but I wanted to put it through one further revision first. Unfortunately, I have not gotten around to doing so, and it is still sitting on the shelf. I hope to get to it soon.

Greg, Agreed, there’s a lot of misunderstanding about both Keynes and Hayek.

Mike, I don’t disagree with Delong on that. I don’t have a strong view about whether the Bush tax cuts on top rates should expire. I can see plusses and minuses either way, but I think both sides are probably exaggerating the effects.

Mitch, I agree, Sachs was not accurately describing what Krugman believes.

Benjamin, Thanks. We agree that inflation would do a lot to help the deleveraging process.

Saturos, Yes, but then Sachs really needs to educate himself about state of the art macro, doesn’t he?

I will look forward to reading your paper then. I have found your blogging and papers very enlightening. Particularly your interest in economic history and the history of economics. They even led me to find something good about the eurozone travails; they help us understand what a bad idea recreating the goldzone would be. And I referred to the insane Bank of France, in your honour🙂http://skepticlawyer.com.au/2012/07/17/going-for-gold/

Growth is the answer to most of the problems that the US economy is facing. Even the entire western world could really need a high does of growth. Double digit numbers would be a dream come true. I just don’t see it happen.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.